No equity? Negative equity?

Question

Jeremy Pace · Answer

Account Closed equity is the amount of value available in an asset.  So if a house is worth $100k, and has a $60k loan on it, it has $40k in equity (also, an LTV of 60%).

Alternatively, if the house is worth $100k and has $110k loan against it, it has negative equity, or is underwater.

The equity in a property is often times where you (or any wholesaler) can derive your profit from the deal ... back to the first example, if you get that house under contract for $65k, and sell it for $80k, the seller will make $5k, and you'll make $15k.  The seller will make some money and be relieved of the asset, the buyer gets a property with an 80% LTV (most cases still viable for bank financing, etc.) and you make some money too.

As a wholesaler, low/negative equity makes it much more difficult to create a situation where both the buyer and the seller will be satisfied with the result, but not impossible.

Account Closed · Answer

Thanks @Jeremy Pace ! I understand. Now what are the options for someone with no/low equity?

Jeremy Pace · Answer

Account Closed I suppose the best case scenario is they find some rich guy with a bunch or cash who really wants to buy the house and doesn't care, or you find out a gas station wants to open up their or something.  More often than not, those things won't happen.

I think in the case of no/low equity the seller would want to focus on getting an investor to buy the property 'Subject To' the current financing.  That will work as long as the property will rent for more than it would cost to hold as a rental asset.  That could also work if the buyer had a plan to drastically increase the value of the property.  For example, a buyer wants to buy a three or four bedroom ranch house to convert into an assisted living home ... and they plan on a massive renovation in which they will add 3 more bedrooms, 2 two baths, and a sprinkler system.  Or, the house being sold is a 5 BD/2 BA that the buyer wants to split into a duplex.